Thursday, September 25, 2008

Archbishop of York advocates for international aid but shows complete lack of understanding of economics

Dr. Sentamu said: "Tomorrow morning I will attend a meeting to launch a campaign of 'Education for All' as part of the global effort to achieve the Millennium Development Goals, including the eradication of global poverty by 2015. Of course for such a target to be achieved there needs to be stable financial systems. There needs to be stable financial systems. Without a solid global economic base to work from, the eradication of world poverty would be an even greater task. But as one columnist recently noted, "the President of the United States recently announced a $700 billion bailout plans for banks and financial institutions. One of the ironies about this financial crisis is that it makes action on poverty look utterly achievable. It would cost $5 billion to save six million children's lives. World leaders could find 140 times that amount for the banking system in a week. How can they now tell us that action for the poorest on the planet is too expensive?"

It's sandwiched in between a misunderstanding of stock markets and a call to subsidize English farmers.

In the first paragraph, he brands as "robbers" those who profited by short selling shares of HBOS, a UK mortgage lender. Short selling occurs when you borrow a stock on margin (i.e. with a line of credit from your broker) and you sell it. You are essentially betting that the stock will decline. You cover your short position when you purchase the shares back.

Lehman Brothers' fate was in some ways sealed by short sellers. A huge wave of selling drove the stock down into the single digits. With the stock price so low and no willing buyers, it would have been impossible for the company to raise capital and stay solvent. However, the underlying reason why Lehman failed was because it was poorly run. You cannot hope to short sell a company like Johnson and Johnson into the ground, because J&J didn't lever itself to the hilt and make bad bets on mortgages. Its business is very stable. Lehman's was not. I don't follow the UK stock market, but it's likely that HBOS' business was more like Lehman's than J&J's.

In other ways, HBOS probably deserved its fate, which by the way is not so bad. They were bought out by Lloyds TSB - to be honest, I don't think this is such a good move by Lloyds, but that's another story. Either way, John Sentamu doesn't understand how markets operate. And while it's a core tenet of Christianity to have compassion on all people, I don't think we need to extend this to decrying the demise of a corporation that deserved to fail.

If they can find $700 billion to support the market, will the Government - and bankers – help bail out our farmers? Farmers are facing ruin not because of bad investment, or speculation. Can we help secure the vital food security they provide?"

I've explained elsewhere that food subsidies in the US often come at the expense of farmers in the Global South, who aren't able to price their goods to compete with US farmers. If not for the subsidies, farmers in the Global South could possibly make more money exporting crops to the US. Worse, sometimes it's cheaper for countries to import food from the US, especially the subsidized food aid to Africa - when there is food on the ground that could be bought if the US were to donate cash directly.

I don't believe that the UK operates a crop export program in the guise of food aid. But I'd still worry that John is advocating subsidizing UK farmers at the expense of farmers in the Global South - such as in his native Uganda.